It pays to fully understand features of 401(k) plan

ANDREW LECKEY

September 15, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Baby Boomers concerned about their golden years are

turning in droves to 401(k) plans offered through their employers.

Worries about the Social Security system and company pensions prompted the rush to these retirement vehicles, which permit employees to shift part of their salaries before taxes into various investments.

The most popular 401(k) investment options, in order, are (1) the fixed-rate choices, (2) stock in the company and (3) equity mutual funds.

Just don't take your 401(k) for granted. Understand features of your employer's plan. Keep in mind that 401(k) plans are not all alike. Develop investment knowledge and tailor your plan to your age and personality.

Some plans aren't explained properly or designed well. They don't offer many choices and make adjustments difficult. They may also pass too many fees on to you, rather than the company.

But other 401(k) plans are superb, with more choices than you thought possible, providing information through innovations such as voice response and giving the employer opportunity to be generous.

"Most companies match 50 cents on the dollar up to the first 6 percent of pay contributed to a 401(k), although dollar-for-dollar matching is not uncommon," said Ray Maddock, a consultant in the defined-contribution administration group of Hewitt Associates in Lincolnshire, Ill., a benefit and compensation firm. "Employers like the 401(k) because they can control the costs better."

According to the most recent statistics of the U.S. Department of Labor, there are 83,000 401(k) plans with 17 million participants and $357 billion invested. That should reach $1 trillion by the end of the decade as corporations shift the burden of retirement to the employee.

"The pension system in the United States has changed dramatically because of rapid growth of 401(k) plans," noted John Turner, a deputy director of the Department of Labor.

"Of individuals who have 401(k) plans available to them, 70 percent take advantage of them," observed Robert Reynolds, president of Boston-based Fidelity Investment's defined-contribution business. "In most cases, the remaining 30 percent didn't participate primarily because the plan wasn't fully understood in terms of investor rights and where the money goes."

New Department of Labor rules, still not crystal-clear, require at least three investment options (besides company stock), with different risk and return, as well as the right to switch among investments at least quarterly. Improved disclosure about investments also is required. Employees must be given enough information to make sound choices.

"We have four basic core funds, but we also have a brokerage option through which employees can purchase any stock or bond traded on the three major exchanges, as well as the entire family of funds offered by Fidelity Investments," explained Elizabeth Edwards, manager of capital accumulation plans at PepsiCo in Purchase, N.Y. "We have taken a leadership role in this type of innovative option."

Remember 401(k) fundamentals:

* For 1993, employees can put in a percentage of salary that cannot exceed $8,994. This amount is indexed each year.

* Three-fourths of employers require at least a minimum level of service to qualify, usually one year. Employers on average allow participants to contribute up to 10 to 12 percent of pay.

* Expenses such as bookkeeping fees shouldn't exceed $100, )) asset management fees shouldn't be more than 1 percent and one-time sales charges should be very low or non-existent. Determine how much is footed by company or employee.

* There are loans, in which most employers tie the interest rate to some variation of the prime rate. There's usually a five-year repayment requirement, although longer in the case of purchasing a principal residence. There are hardship withdrawals, limited to situations such as preventing a home foreclosure or paying for medical expenses or college tuition.

* A plan participant can request that the current employer plan directly transfer the money either to a new employer's plan or an individual retirement account of his choice. By doing that, the ZTC employee avoids the hassle of having to get a check, with 60 days to roll it over, and a mandatory 20 percent withholding on it.

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